Students Will Help Save Apple

The tech company may look vulnerable to an economic downturn, but back-to-school shoppers should help it keep up a strong financial performance

by Arik Hesseldahl

Take a look around and it's hard not to get depressed by all the negative economic news. Home prices keep sliding. Credit is drying up. Inflation fears are on the rise. And consumer confidence is lower than it's been since the early 1990s.

You would think all of this would eat into the business at Apple (AAPL). The company's computers tend to be pricier than those from Dell (DELL) or Hewlett-Packard (HPQ), while its iPods and iPhones are the sort of discretionary purchases that consumers often cut out during an economic slowdown.

Paul Kedrosky thinks Apple is about to take a hit from the slowing economy. The Kauffman Foundation senior fellow who edits the business and economics blog Infectious Greed recently argued on Yahoo's (YHOO) Tech Ticker that since Apple's products are "aspirational," consumers can do without them and opt instead for cheaper alternatives from others, or bypass electronics purchases altogether. He's expecting Apple to miss its earnings targets for the current quarter and to lower its outlook for the quarter after that.

I think he's way off. So we've agreed to wager $50 on Apple's earnings announcement coming up in mid-October. He is betting that Apple will miss consensus estimates for the current quarter of $1.11 and say that gross margins for the next quarter will be less than 30%. I think Apple will at least meet the consensus and will keep its margin guidance higher than that. If Kedrosky is right on either metric, I'll write a $50 check to the National Resources Defense Council. If I win, he'll send $50 to the Susan G. Komen Breast Cancer Foundation.

Computer Sales Matter

Kedrosky's assumption seems reasonable until you start looking at what's really driving Apple. For all the attention the iPhone has been getting, Apple's performance in the quarter ending Sept. 30 will largely be determined by sales of its computers.

And in this back-to-school season, college kids are buying Macs in numbers never seen before. A recent survey by Student Monitor, a New Jersey outfit that tracks the buying habits of college students, found that 13% of all undergrads expect to buy a new notebook this fall. Of those, 43% say they plan to get a MacBook or MacBook Pro, nearly double those who said they expected to get a Dell notebook, and seven times as many as those who plan to buy from HP, says Eric Weil, the firm's managing partner. While students prefer Dell for desktop computers, that's small consolation: Students favor notebooks over desktops by a factor of nearly 5 to 1.

Ask among the college students you know and you'll probably find lots of new Mac-users like Joe Praetorius of Springs, Texas. The 17-year old is headed first to Houston's Media Tech Institute to study sound engineering, and then on to Boston's Berklee School of Music after that. I heard that the Mac was best for sound engineering and editing, he says. Gina Elliott, of Bronxville NY, who's headed to Georgetown University got her first Mac earlier this year after finding Windows, which she'd used for her entire computer-using life, irritating. I was really frustated with Windows. Things were difficult to find and it took a long time to figure things out. Just this week, she convinced her Mom to switch.

Back-to-school time has always been important for Apple. In 2007 the company sold nearly 2.2 million Macs in its fourth quarter ended Sept. 30, up 34% from the year-earlier period. Those computers brought in $3.1 billion during the 2007 quarter, half of all the company's revenue.